Sunday, August 24, 2014

The Minimum Wage Doesn’t Really Help the People We Think It Does

Raising the minimum wage nationally has been a hot political subject for a few years now, and many jurisdictions around the country have already raised it locally.

On the pro side, 1) if we take cumulative inflation seriously, then yes it’s probably time to adjust it, and 2) the “common sense” that it reduces employment doesn’t appear to be persuasively supported by the data.

But, here’s an idea familiar to economists that the public just doesn’t talk about much: a plurality of people who earn the minimum wage already live in high income households.

You see, when the minimum wage was first instituted a few generations back, most people who worked at the wage lived in low income households. So a minimum wage certainly helped them make ends meet.

That’s a good thing. I don’t know if the effect was strong enough to counterbalance the theoretical loss of jobs, but it’s close enough that reasonable people fall on both sides.

And that’s the urban myth that continues to be most people’s argument for supporting the minimum wage today.

Except it’s an urban myth because it really isn’t true any more.

These days the typical minimum wage worker is a teenager from a high income household: one with access to job openings, transportation to jobs, and immersed in a culture of employment. This is not your typical poor person in America: without ready access to job openings, often living where transportation to jobs is spotty, and distinctly not immersed in a culture of employment.

[Calculated estimates indicate that] if we were to raise the minimum wage to $10.10 per hour nationally, 18% of the benefits of the higher wages (holding employment fixed) would go to poor families, and 29% would go to families with incomes three times the poverty level or higher.

What about minimum wages as high as $15 an hour? Applying the same calculation as above for a $15 per hour minimum, the share of benefits going to poor families would decline to 12%, and the share to families more than three times the poverty line would increase to 36%. [emphasis via a quote posted at Carpe Diem].

Let me put some perspective on that. A household with income 3 times the poverty level corresponds roughly to that of a married SUU professor, with a spouse who doesn’t work, and two kids … one with a job at McDonald’s.

This is not necessarily a reason to be against a minimum wage increase, because there is still a positive effect on the poor. But, it is an argument that if your motivation for raising the minimum wage is to help the poor, then there are probably other methods you should think about first.